Council faces probe into 'time-bomb' Lobo loans from City amid cuts in children's services

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The Abbey Lane Children’s Sure Start centre in the London Borough of Newham is a noisy hub of toddlers and mums. Catering for babies and tots up to five years old, it offers a lifeline to families in one of the capital’s most deprived boroughs.

Yet an air of gloom has descended over its colourful playrooms after Newham council slashed the number of days it was open from six to two-and-a-half.

Akosua Oppong, who has been taking her little boy to Abbey Lane for the past two years, says classes shut down despite her and fellow mothers launching a petition last year to save services.

“We can’t cut any more services from the ones we have at the moment. Our children will suffer,” she says. “We don’t want to take away from the people who are going to be making Newham what it is in the future.”

While Sure Start centres and other local services have come under threat since the financial crisis brought austerity to council budgets, activists say there is a another problem in the case of Newham. They point to the nearby glittering towers of Canary Wharf.

Newham was one of the biggest borrowers of controversial bank loans known as Lobos. Scores of other councils bought these loans in the hope that they would secure low interest rates for taxpayers, but they could potentially end up behaving like time bombs in future.

” It’s like you’ve been given an umbrella to carry around by the bank and then when it starts to rain the bank takes the umbrella away from you.”

Derivatives expert Abhishek Sachdev

Lobo loans were designed to protect the borrower from rising interest rates. In the early-to-mid 2000s, the protection they offered seemed extremely attractive to risk-averse councils. The trouble was, if interest rates fell — as they have — the borrower has to pay, big time.

As interest rates have stayed at near-zero levels, councils who bought the loans could potentially have to make sky-high payments compared to current rates. Experts say they might also face exorbitant exit fees to break out of the contracts, though not in Newham’s case where payments have apparently not been raised.

Derivatives expert Abhishek Sachdev of Vedanta Hedging has been studying Lobos for years. He says: “They are incredibly complex, but the upshot is it’s like you’ve been given an umbrella to carry around by the bank and then when it starts to rain the bank takes the umbrella away from you.”

Such derivative-based loans are so complex that they have traditionally been the preserve of high financiers, not local government officials. Yet these councils bought Lobos on an industrial scale from 2002 to 2011. Newham took out 27 Lobos worth £564 million, according to campaigners citing Freedom of Information requests.

Financial analyst Nick Dunbar claims that the decision has cost the council at least £10 million — and counting — more than it would have if it had borrowed directly from the Government. That would be enough to keep Abbey Lane Sure Start open for decades. Newham denies this and says it has saved millions.

What are Lobo loans?

Lobos — an acronym for lender option, borrower option — are long-term bank loans with interest rates that can be re-fixed by the bank in the future.

They were invented in the mid-1980s but took off from 2002 onwards with their sale to councils but the market for them has effectively been closed since 2012 due to shrinking demand.

A bank would offer a council an interest rate typically 0.5% below what they could borrow from central government.

The bank has the option to increase the interest rate in future and the council can accept the new rate or pay fees to exit the loan.

Dunbar says the other 48 councils across the UK he has studied who took out Lobo loans have had to pay an extra £28.2 million so far.

But this is not the only concern. The way the loans were sold is also leading some to question the system of supposedly independent advisers and the banks that created them. The councils would usually rely on a consultant to whom they paid a fee to give information on loan options. The consultant would, in turn, go with a broker, who would then approach a range of banks to provide the loans.

However, it has emerged that some of the consultants being paid for their independent advice had close relationships to the brokers. One, Butlers, was actually owned by Lobo broker Icap.

Another, Sector, was made up of former staff of Tullett Prebon — another of the Lobo brokers. Sector received a share of fees earned by Tullett if one of Sector’s council clients chose to buy a Lobo through Tullett and Butlers also had a similar arrangement with Icap, according to a Competition Commission probe.

Sector, which now owns Butlers, said it did not direct local authorities to seek funding from any specific organisation as the choice was that of the local authority alone. Tullett declined to comment.

Freedom of Information requests by activist group Move Your Money revealed that, on the information available, it appeared Butlers recommended its local authority clients went with Icap on 84% of the Lobo deals it advised on.

Icap says it gave analysis and information but not advice, and the decision-making was done by treasury officials at the local authorities. It adds it is no longer involved in such business and all individuals who were have left.

Barclays and RBS were among the biggest players in the Lobo market. Rob Carver, who structured Lobo loans at Barclays in the early Noughties, says he quit because he was so concerned about the products he was making. He told the Evening Standard that Lobo requests were highly coveted by trading desks: “These were among the most profitable things we were doing. When one of these deals arrived, everyone’s ears would prick up and there was a lot of pressure to get the deal done.”

Carver claims that not only were some independent consultants who worked for the councils close to the brokers doing the deals but also in some cases the consultants were getting commissions from the brokers. So some were paid by the council and by the broker they had included in their selection to go and arrange the loans.

Carver has testified to a Parliamentary committee: “The brokerage fees were quite large compared with the fees we normally paid, and there was lots of pressure to pay higher fees. It smelt and felt to me like there was something really dodgy going on.”

Barclays says no council has ever complained about Lobos it sold, adding: “Barclays’ Lobo loans are straightforward, fair and easily explained to local councils.” It adds that it was always approached because of demand from local authorities.

The fight for transparency

Public knowledge about Lobos has been driven by a small band of activists trying to shed light on UK council financing.

Lobby groups Move Your Money and Debt Resistance UK have obtained about 800 Lobo contracts after submitting more than 550 Freedom of Information requests to councils across the country.

In Newham’s case, it refused three FOI requests for the contracts. Activists obtained details of the Lobo loans after applying for them using laws contained in the Audit Commission Act.

RBS said councils’ finance and treasury functions, which bought the loans, are “run by qualified officers and have statutory power to manage their own financial affairs”.

Some members of Newham council are now kicking up a fuss about the loans, which they want investigated. John Gray and John Whitworth, members of Newham’s accounts committee, and audit board member Rokhsana Fiaz have complained to a Parliamentary committee, declaring the loans were “one-way” bets in favour of the banks which could leave the council millions of pounds out of pocket.

Newham’s audit board has recommended that the council examine whether it should consider taking legal action. Newham council disputes the loss figures, claiming Government funding would have worked out more expensive. It stated that it has saved £64 million since 2002 by using Lobos. Denying that Lobos have led to cuts in public services, a spokesman blamed Government funding cuts, and added: “Newham is not alone in having to make changes to the way it delivers early-years support.”